Global Economics

U.S. Companies Eye British Takeovers


British companies such as AstraZeneca, BAE Systems, and Balfour Beatty could become takeover targets for U.S. buyers thanks to the weaker pound, says S&P

American companies are preparing to launch daring takeover bids for a host of Britain's biggest corporate names – including possibly BAE Systems (BAESY) and AstraZeneca (AZN) – thanks to the weakness of the pound against the dollar.

Sterling has lost about a quarter of its value against the dollar in the last two-and-a-half years, and combined with the feeble recovery in the UK economy, British firms have become much cheaper for American suitors looking for a good deal.

Following the controversial takeover of Cadbury earlier this year by the US food giant Kraft (KFT), and the buyout of Gatwick Airport by an American private equity firm, analysts at Standard & Poor's predicted last week that a number of well-known UK companies, including AstraZeneca, BAE Systems and the contractor Balfour Beatty (BAFBF), could soon fall into American hands.

"AstraZeneca and BAE are both in sectors where US groups have lots of cash and where they are looking to make acquisitions," said Mike Thompson, managing director of strategy and risk at S&P. "AstraZeneca, for example, has a value of about $65bn [£43bn], but this is no longer that daunting for US firms. UK drug groups have a good profile for American rivals and if you consider that the likes of Johnson & Johnson (JNJ) has a value of about $160bn, you can see where a deal could come from."

Spokesmen for AstraZeneca, BAE Systems and Balfour Beatty, another group on S&P's list, all refused to comment on the report, but it is ultimately the owners of these companies that will have the final say. If the offer is high enough, the City will bite.

Highly priced deals are undoubtedly good news for UK shareholders, often pension funds, and for the executives of targeted companies, who can rely on a big bonus from their new bosses for oiling the takeover process. But while the City, and the coalition and Labour governments have largely cheered on the deals, unions have warned that the impact on jobs is likely to be severe.

Last September, Cadbury spurned Kraft's advances before giving the deal the green light in January after an improved £11.5bn offer. On the day Kraft's bid was recommended by the Cadbury board, Kraft's chairman and chief executive Irene Rosenfield said: "We have great respect for Cadbury's brands, heritage and people. We believe they will thrive as part of Kraft Foods."

Days after agreeing the price, Ms Rosenfield's company announced that it planned to close Cadbury's Somerdale factory near Bristol, which it had earlier said it would save. The U-turn led to censure from the Takeover Panel and Lord Mandelson, who was Business Secretary. As many as 400 jobs were earmarked for redundancy.

Paul Kenny, general secretary of the GMB union, said yesterday: "For far too long there has been an assumption that who owns what does not matter, but it certainly does. Where cutbacks have to be made, it is people in outlying overseas plants, like those in the UK, that are hit with job losses. We will be working with the new owners of companies to ensure that this does not happen and use every sinew to ensure that these companies have a successful future."

The GMB says it is in talks with officials at American Sugar Refining, which confirmed last week that it was in talks with Tate & Lyle (TATYY), one of the sugar industry's biggest names for the past 150 years, to buy its refining business in London's Docklands. A sale would end the group's association with the sugar industry as it switches its attention to the food ingredients market.

It is not just well-known names that are being snapped up by the Americans. Last week Scott Wilson Group, a mid-tier engineer, toasted a 290p-a-share offer from its US peer URS (URS), which represents a 233 per cent premium to the group's valuation before it disclosed that takeover talks were taking place. The premium is the second highest paid for a British company in the past 10 years, but while URS said that it would look to protect engineering jobs, is conceded that "efficiencies" would be made in several areas.

At the same time, Chloride (CDGPY), a FTSE-250 listed power company, said that it would accept a £997m offer from its American rival Emerson Electric (EMR). Speculation about a deal has helped to double the value of Chloride in just the past six months, while Brit Insurance, one of the City's most recognisable names, has now twice spurned the advances of the US buyout firm Apollo.

In many cases, it is investment banks that help to drive the mergers and acquisitions (M&A) market by identifying takeover targets for clients, and picking up huge fees in return. Mike Thompson of Standard & Poor's (MHP) said that banks were partly behind the recent takeover surge. "For the report, we tried to get into the heads of the M&A bankers," he said. "The case for buying the companies on our list is being made left and right by the bankers, and with the sovereign debt crisis in Europe stymying the level of the pound, many of these arguments will be looking more attractive."

Last week, data group Thomson Reuters (TRI) said that the US investment bank Goldman Sachs (GS) topped the list of worldwide M&A advisers in the first half of the year.

And analysts predict that the trend of corporate Britain falling into US hands is likely to continue for some time. "Largely as a result of the financial crisis and the dollar's perceived position as a safe haven, sterling's losses are not to be reversed any time soon," said Grant Lewis, head of economic research at Daiwa Securities (DSEEY). "Looking back, sterling was undoubtedly overvalued and with the rebalancing that is needed in the UK economy, it is difficult to see sterling rising much higher than its current level for the foreseeable future."

Gone...

Cadbury

The £11.5bn takeover of the British confectioner by the US food giant Kraft is one of the most famous deals of modern times. Kraft got into hot water almost at once, however, by reneging on a promise not to cut hundreds of UK jobs.

Gatwick

London's second-busiest airport was sold to a US private equity investor, Global Infrastructure Partners (GIP), which owned London City airport. The £1.5bn deal came last October after competition watchdogs ordered the former owner, BAA, to sell. GIP has since sold a stake in Gatwick to a California-based pension fund for public-sector employees.

Tate & Lyle

It seems Tate & Lyle, which has been in the sugar industry for 150 years, is to sell its last refinery in London's East End. The City has welcomed the possibility of a deal after the EU introduced a new sugar pricing regime last year which put pressure on the business.

Going?

Balfour Beattyy

Named as a top UK buyout target by Standard & Poor's. As the shares of most FTSE-100 companies edged up over the past year, the infrastructure contractor's stock fell 15 per cent. Despite the new Government promising to scrap projects, Balfour Beatty has won several contracts, making it attractive to US suitors.

AstraZeneca

As the pharmaceuticals industry looks to offset the impact of drugs losing patent protection, companies have been combined to limit the effect on earnings. AstraZeneca is seen as having an ageing portfolio (which has held back its share price) but also exciting new treatments in the pipeline, which could attract bidders.

BAE Systems

The company has lost value because the City is worried about defence cuts. But while the UK armed forces are a key customer, BAE also has huge overseas contracts. A takeover is considered unlikely, however, given the regulatory hurdles any buyer would have to overcome.


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